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by Lo’Ai Shatara – Rise CPA Senior Manager, US Tax

There are several penalties that the Internal Revenue Service (“IRS”) imposes and they inform taxpayers of these issues via a notice letter. The most common penalties relate to the following:

• Information Return – This applies to taxpayers who do not file or provide the IRS their required information returns correctly by the due date.
• Failure to File – This applies when you don’t file your tax return by the due date. The penalty you must pay is a percentage of the taxes you did not pay on time. The IRS calculates the Failure to File Penalty based on how late you file your tax return in addition to the amount of unpaid tax. The IRS will calculate the penalty based on the original payment due date, not the extension due date. Unpaid tax is the total tax required to be shown on your return minus amounts paid through withholding, estimated tax payments and allowed refundable credits.
  • Below is the way the IRS calculates your penalty:
    • The Failure to File Penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late. The penalty won’t exceed 25% of your unpaid taxes.
    • If both a Failure to File and a Failure to Pay Penalty are applied in the same month, the Failure to File Penalty is reduced by the amount of the Failure to Pay Penalty for that month, for a combined penalty of 5% for each month or part of a month that your return was late.
    • If after 5 months you still haven’t paid, the Failure to File Penalty will max out, but the Failure to Pay Penalty continues until the tax is paid, up to its maximum of 25% of the unpaid tax as of the due date.
• Failure to Pay – This applies to taxpayers who do not pay the tax reported on the tax return by the due date or approved extended date. The penalty is 0.5% of the unpaid taxes for each month or part of a month that tax liability remains unpaid. The penalty won’t exceed 25% of the unpaid taxes.
• Corporate Underpayment of Estimated Tax – This penalty applies to the corporations that do not pay enough estimated tax payment or pay them late. The penalty still applies even if the IRS owes a corporation refund.

What to Do If You Got an IRS Notice

Check that the information on the notice is correct. The notice will have information about the penalty, the reason for the charge and what to do next. Follow the instructions.

If you can correct an issue in the notice, there may be no penalty. If the information is correct and you don’t agree, you may be able to dispute the penalty.

Contact Rise CPA if you need help dealing with the IRS notices.

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